Yanzhou Float to Make 2012 a Happier New Year

With equity capital markets in Australia set to finish 2011 on a subdued note, many bankers will be hoping for a happier new year. One of the most closely anticipated floats will be Yanzhou Coal Mining’s Australian business, comprising largely the assets acquired in a 3.5 billion Australian dollar (US$3.47 billion) takeover of Felix Resources in late 2009.

In an exclusive interview with Deal Journal Australia, Zhang Baocai, Yanzhou’s board secretary and deputy general manager, provides an insight into the company’s current thinking about the ASX listing.

By Chester Yung

China’s Yanzhou Coal Mining plans to list all its Australian coal assets in 2012 rather than only those acquired in a A$3.5 billion takeover of Felix Resources, and is considering a reverse takeover to fulfil commitments to Australia’s regulators.

The comments by Zhang Baocai, Yanzhou’s board secretary and deputy general manager, will give a shot in the arm to Australia’s flagging equity capital markets following a torrid year that saw a biggest IPO of just US$217 million and combined listings worth US$989 million, down 87% compared with 2010.

Bloomberg News

The debut of Yancoal Australia on the Australian Securities Exchange will also help fill a gap in the ranks of mid-sized coal producers after a series of multibillion dollar buyouts this year, including Peabody Energy Corp.’s takeover of Macarthur Coal and the joint bid by Rio Tinto and Japan’s Mitsubishi Corp. for full control of Coal & Allied Industries Ltd.

Yanzhou gave an undertaking to list at least 30% of its Australian unit by the end of 2012 when acquiring Felix Resources two years ago, in a move aimed at soothing concerns from some politicians and commentators about the amount of state-backed Chinese investment in Australia’s resources sector.

“We’ve done the initial preparation and are confident of completing (the listing) by the end of next year,” Zhang said in an interview with Deal Journal Australia.

Yanzhou, which is China’s third-largest listed coal miner by output after China Shenhua Energy and China Coal Energy, hasn’t picked a financial adviser for the listing yet but favors UBS AG because the Switzerland-based bank has previously advised it on transactions, Zhang said.

Its adviser would be expected to weigh the potential of a reverse takeover as well as a conventional IPO, although the glut of deals for large coal miners this year means the ranks of possible targets for Yanzhou to back into and gain an ASX listing has thinned out substantially.

“We’re considering both options, and haven’t finalized our plan yet,” Zhang said. Zhang said around US$2 billion is earmarked for overseas acquisitions and Australian assets are firmly on the company’s radar.

Should the company ultimately opt for an IPO then the proceeds would also be used to fund new acquisitions, he said.

Investors are increasingly wary of new floats in Australia following a string of disappointing listings, including the A$2.3 billion float of retailer Myer two years ago, which has never traded at or above its issue price of A$4.10.

Sluggish stock performance–the S&P/ASX 200 is down 12.7% year-to-date–is also making companies leery of coming to market, something Zhang acknowledged.

But the Australian coal sector has been partly insulated from these headwinds due to the mergers and acquisitions activity among big miners, with A$5 billion-valued New Hope Corp. up for sale and Whitehaven Coal’s recent A$3 billion proposed acquisition of Aston Resources.

Yanzhou has played a central role in consolidating the Australian coal industry since the Felix acquisition, which closed in December 2009. The company needs to grow overseas as annual coal output at its mines in China, mostly in the eastern province of Shandong, has stagnated at around 35 million metric tons.

It acquired the Premier Coal unit of Wesfarmers for A$296.8 million in September, following on from earlier deals to buy closely held miner Syntech Resources for A$222 million and an additional 30% stake in the Ashton coal mine from closely held IMC Resources for US$250 million.

The Premier Coal deal reignited concerns about strategic coal assets in Australia falling into foreign hands, as the business is one of the two major producing mines in Western Australia state and a key supplier of domestic power plants. The other mine–Griffin Coal–was sold to India’s Lanco Infratech this year.

However, Zhang said the Australian government hasn’t asked Yanzhou to provide any assurance that it will continue to honor contracts to supply domestic power stations or attach any other condition to the deal.

“We haven’t encountered any obstacle from the Australian government (about the deal),” he said.

Zhang said Yanzhou is targeting production of 50 million tons of Australian coal from this year through 2015, and it has produced 15 million tons to 20 million tons of coal in 2011 so far.

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Deal Journal Australia is an up-to-the-minute take on the deals and deal makers that shape the Australian landscape, including mergers and acquisitions, capital raisings, private equity and debt markets. In short, wherever money changes hands. Deal Journal Australia is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s Gillian Tan is the lead writer, with contributions from other Journal and Dow Jones reporters and editors. Send news items, comments and questions to gillian.tan@wsj.com.

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